Saturday 18 December 2010 19.09 EST
First published on Saturday 18 December 2010 19.09 EST

The day the first rise in unemployment since the spring was announced also brought news that Morgan Sze, head of proprietary trading at investment bank Goldman Sachs, was leaving to start the world's largest hedge fund, based in Hong Kong. Mr Sze's decision rippled around the world's financial markets – symbolic of the gathering confidence that the good times are back – while here we heard that one in five 18- to 24-year-olds is now without work. The gap between the two worlds could hardly seem wider.

In reality, they are all too connected. The outlook for unemployment is more pessimistic than stated by the current consensus, perfectly reflected by last month's forecasts from the Office for Budget Responsibility (OBR). Its central view is that unemployment will peak at a little more than 2.5 million next year and then fall for the next four years. But there can be no fall in unemployment in 2011 until the economy starts creating more full-time jobs. And the number of those fell again in October for the sixth consecutive month, even though the economy has been buoyant.

There is no sign of any imminent reversal of this trend, especially as the economy is going to be less buoyant in 2011 as a still crocked financial system refuses to lend to small business, the housing market stagnates, the VAT increase kicks in and public spending cuts radiate around a private sector that depends on the public sector. A record 1.16 million people have to work part-time because there is no full-time work. Meanwhile, the public sector lost 33,000 full-time jobs in the last three months – and there is more to come in 2011. The British private sector is not going to create full-time jobs to compensate in any significant number any time soon.

Britain has a two-tier economy. There is the world of wheeler-dealer finance in which the Morgan Szes are seen as role models. Their returns are the benchmarks for pay for which everyone aims; any restraint on their activities or bonuses is seen as "anti-competitive", an infringement of their God-given rights and a trigger to an exodus from London, even if the whole system is still underwritten in the UK by more than £500bn of taxpayer guarantees two years after the crisis.

Beyond, there is the real economy, whose capacity to create sustainable jobs is becoming increasingly impaired. The dynamic elements are the companies which one way or another deal in goods and services with a high "knowledge" content. This stretches from writing computer game programs to diagnosing faults in aero engines in real time, from thinking up new recipes to creating new applications on mobile phones. These companies may be the future (and Britain has a surprising number of them) but they are careful who they hire. Their markets are constantly changing. They keep their costs under control. They jealously protect their staff who know the nature of the work and the client base – and they are wary about hiring the young, especially if they are unskilled or look as though they will not fit into the fluid teams that are at the core of knowledge work.

And there are the companies in the wider sectors – manufacturing, for example, or mass production of back-office services – which are more slow-growing, face stagnating demand and intense competition from low-cost, less-developed countries. They are even more cautious who they hire.

The geography of this emergent economy is dismaying. Finance and the dynamic knowledge companies tend to be in the south-east or around a few of our great regional cities – Manchester, Bristol, Leeds and Edinburgh. But many of Britain's smaller towns and cities – Hastings, Barnsley, Plymouth, Blackburn, Hull, Mansfield – boast little activity in the "knowledge" economy. They are just too small either to supply knowledge companies with the range, skill and depth of workforce they need and lack enough rich consumers to help start-up companies get off the ground.

For 10 years to 2008, this reality was disguised. Easy credit and rising property prices fed rising spending. The public sector, fed by rising tax revenues, stepped in to provide work in the weaker parts of the British economy. The Work Foundation calculates that more than 70% of all the net new job generation outside London, the south and south-east came from the public sector. Without it, the West Midlands in particular would have been an employment disaster area.

It is this economic structure that is now supposed to launch a jobs boom. The government wants to make work pay for the unemployed by changing the benefit rules. But reform depends on jobs growth. The real issue is the bedrock economic structure and the new geography of employment. If the world economy does accelerate in 2011 and 2012, then the UK's first-tier economy will begin to respond as the OBR predicts. But the second tier will still languish.

This is where Big Finance, typified by Morgan Sze and his values, comes in. If second-tier Britain is to have any chance, it must at the very least have banks which will lend to its small and medium-size companies. But here is the rub. The first rule of finance is that big banks work with big business and small banks look after small business. Britain has big banks which are geared up to provide loans to big companies and, for that matter, big hedge funds. Of course, creating small and medium-size banks is not the sole means to revive Britain's second-tier economy and wean it off its dependence on the public sector. But without them we cannot even make a start.

That means taking on Big Finance, its values and bonuses. Is the priority to ensure that the world's Morgan Szes congregate in London and that our big banks can pay the astronomic bonuses to compete? Or to address the geography of British unemployment? On this question, I hear that Clegg and Cable have decided to raise their standard. They have been human shields for the coalition over the spending cuts and tuition fees, but not over big banks and their bonuses. They want restraint even if it means banks leave Britain. They intend to back to the hilt the radicalism they hope for from the Banking Commission, set to report in the autumn, about breaking up big banks.

George Osborne was in New York last week trying to convince the New York financial community that Big Finance and its bonuses were safe in London, while David Cameron has called for a ceasefire on "beating up bankers". After Nick Clegg fired a warning shot over bank bonuses, however, Cameron flipped and sided with his deputy. Bonuses are but a forerunner of a bigger battle – the structure of British finance. Clegg and Cable have to win this struggle. On it the future of large parts of the country – and their party – depends.